Despite Catalonia's upcoming deadline to clarify its stance on independence, the euro is rising this morning. The currency also rose yesterday, after initially selling off in the morning. US bond yields rose yesterday on increasing interest rate hike expectations, but that had a limited impact on the euro. The currency is usually more sensitive to interest rate differentials. Looking at other news, the German DAX index joined US stock market indices and hit a new record. Rising stock markets may suggest that speculators are pricing in ECB tapering given good Eurozone economic growth.
The EUR/USD exchange rate is now above 1.1810. Looking at EUR/JPY, the euro is up sharply against the yen as the yen is far more sensitive to interest rate differentials. The pair is currently trading above 133.50. The euro is also up against the pound today, with EUR/GBP now trading above 0.8950.
This is a fairly critical week for the Eurozone. On Monday, Spain’s deadline to Catalonia seeking clarification regarding its earlier declaration expired. The deadline was extended to this coming Thursday (10AM). If Catalonia declares independence or fails to respond, Spain may trigger Article 155 (dismantling the government of Catalonia). Monday's trade balance figures for August were lower than the previous reading (16.1b vs. 23.2b). Tuesday's German ZEW surveys were disappointing while inflation figures matched expectations. The current situation survey (87 vs 89 expected) and the sentiment survey (17.6 vs 20 expected) were both below average estimates. Year-over-year CPI came in at 1.5% (matching estimates), while core CPI was slightly above estimates (1.3% vs. 1.1% expected). Finally, the European Council Meeting is scheduled for October 19 and 20 (Thursday and Friday). Given the ongoing Brexit negotiations, the outcome of the meeting will be watched closely. German producer prices will also be announced on Friday.
After strengthening on October 18 and continuing to rise, we are upgrading the euro to neutral. Previously, the currency had been broadly weakening since October 12. Looking at various technical indicators, the currency is neither oversold nor overbought and is trading within normal conditions.
After rallying in the second week of October, our medium-term outlook on the euro is now neutral. The currency is appreciating as the ECB is expected to announce its decision to taper quantitative easing next year. Recently, Catalonia's president also avoided a unilateral declaration of independence, choosing instead to call for dialog while accepting the mandate of the referendum. We continue to believe that the euro is overbought, based on various technical indicators when looking at a weekly chart.